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Centerra, which owns the Kumtor mine in Kyrgyzstan, says a restructuring plan aimed at giving the Kyrgyzstani government a bigger stake in one of the world’s largest gold mines would become impossible if its shares are seized by Stans.Shamil Zhumatov/Reuters

The fate of one of the largest gold mines in the world, nestled in the remote mountains of Kyrgyzstan, could rest on the outcome of an obscure Canadian court battle.

Toronto-based Centerra Gold Inc. owns the Kumtor mine, but has faced political pressure and protests over its environmental impact and over whether Kyrgyzstan is getting its fair share of the profits.

Centerra is essentially a legal bystander, however, as a court case in Toronto proceeds over whether another company can seize millions of dollars worth of Centerra shares that are held by a Kyrgyzstani state-owned enterprise. If the shares are seized, Centerra says, a restructuring plan aimed at giving the Kyrgyzstani government a bigger stake in the mine would become impossible.

The Canadian court battle involves another Toronto-based natural resources company, Stans Energy Corp., which alleges that it was unfairly blocked from developing an open-pit rare earth metals mine in Kyrgyzstan.

Stans challenged this decision in international arbitration proceedings in Moscow, alleging that Kyrgyzstan violated the Moscow Convention, a 1997 treaty among post-Soviet countries on foreign investment. In June, Stans Energy won an order in Moscow demanding that Kyrgyzstan pay the company $118-million (U.S.). Kyrgyzstan has refused to pay and has appealed that decision in Russia's courts.

In the mean time, Stans went looking for Kyrgyzstani state assets outside the country to seize. That's where Centerra comes in. Kyrgyzaltyn JSC, a Kyrgyzstani state-owned enterprise, owns 32.7 per cent of Centerra's shares. So Stans launched an action in Ontario Superior Court to have $118-million-worth of those shares frozen, pending a future court decision on whether they could be seized. Lawyers for Kyrgyzaltyn are seeking to appeal the freeze order.

(A previous Ontario Superior Court ruling on the Kyrgyzstani stake in Centerra laid the groundwork. That case involves a separate $11-million international arbitration award against Kyrgyzstan claimed by the Turkish former owners of a hotel in the Kyrgyzstani capital of Bishkek allegedly seized at gunpoint in 2005. In April, 2014, an Ontario judge decided that Kyrgyzaltyn's shares in Centerra really belonged to Kyrgyzstan itself and could be seized. Kyrgyzaltyn appealed, and the Ontario Court of Appeal heard that case late last month.)

No one expects doing business in a former Soviet republic to be easy. Despite Kyrgyzstan's lacklustre economy, two uprisings that have overthrown governments in recent years, corruption and ethnic strife, the country is often praised as Central Asia's only multiparty parliamentary democracy.

But the Stans Energy decision comes at a particularly difficult time for Centerra which, like many gold companies, also faces pressure from declining prices for the precious metal.

A Kyrgyzstani former board member of Centerra's wholly owned Kyrgyzstani subsidiary, which owns the mine, was thrown in jail there last year after approving a $200-million intercompany dividend. Kyrgystan contends that the dividend was illegal under its laws; Centerra says it was legal.

Earlier this year, facing criticism from various Kyrgyzstani politicians over the contentious mine – which is the single-largest taxpayer and exporter in all of Kyrgyzstan – Centerra agreed to a draft deal that would set up a new joint venture for the mine, in which the government would get a 50 per cent stake. But the restructuring deal is predicated on Kyrgyzaltyn first handing over its current 32.7-per-cent stake to Centerra, a stake now frozen by the Stans Energy court order.

If courts in Moscow and Canada ultimately side with Stans Energy, and the bulk of those shares are actually seized, Centerra says, the restructuring plan becomes "impossible."

Kyrgyzstani President Almazbek Atambayev suggested in a written statement last month that the government could take "steps to protect Kyrgyzstan's national interests" to decide the mine's fate, accusing Centerra of having "withdrawn by different means the bigger part of profits from one of the world's largest gold deposits," though he did not elaborate.

John Pearson, vice-president of investor relations for Centerra, said restructuring the mine's ownership would address the President's apparent concerns.

"That will increase their return," Mr. Pearson said, adding that the company has been negotiating with a working group that includes Kyrgyzstan's Prime Minister. "Certainly, the Stans litigation needs to be resolved before any restructuring can be completed."

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